Policy Area

Carbon Tax

As the Obama administration launches into its second term, carbon tax proposals are surfacing in Congress that threaten to completely derail any hope of a true economic recovery. The Institute for Energy Research is dedicated to free market energy policies that allow consumers and economic growth to thrive. Nothing is more important for your family’s budget and American prosperity than access to affordable, reliable energy, and nothing could be more devastating for those goals than a carbon tax. IER has recently published a study and a survey to aid policymakers and educate the public about the dangers of carbon tax proposals, most notably carbon tax “swap” deals that attempt to hide behind budget-neutral rhetoric. These studies are consolidated here and are available to download as PDFs.

About Carbon Tax “Swaps” and the Dangers of a Carbon Tax

The Institute for Energy Research released a new study, November 2012, exposing the fallacies of so-called revenue-neutral carbon tax swaps, an idea that has gained some support among even conservative pundits and politicians despite numerous theoretical and practical problems with the scheme. IER Senior Economist Robert P. Murphy reveals in the study, entitled “Carbon ‘Tax Swap’ Deals: A Review and Critique,” that pro-carbon tax discussions currently underway inside Washington may offer a ‘cure worse than the disease,’ robbing global economies of growth potential and disproportionately affecting the world’s poor.

The best literature on the topic actually argues that a revenue-neutral carbon tax swap would make the tax code more inefficient and would hinder economic growth. Some estimates suggest that this ‘tax interaction effect’ is so powerful that the theoretical size of a new carbon tax should be cut almost in half, once extra damage to the economy is taken into account.

The U.S. Government acting unilaterally cannot significantly slow global carbon dioxide emissions. One respected estimate suggests that if only half of the world’s governments implement the ‘optimal carbon tax,’ then the economic cost of achieving a desired environmental objective will increase by 250 percent.

Federal and state governments already have in place many policies that discourage carbon-intensive activities and encourage alternatives, such as gasoline taxes, CAFE standards, and renewable energy mandates. These weaken even the theoretical case for a carbon tax, though advocates rarely include this consideration in their proposals.

The promise of ‘revenue neutrality’ is quite hollow, given U.S. history. The federal income tax rate was instituted with a top tax rate of 7 percent in 1913, which was jacked up to 77 percent by 1918. Currently, there are numerous academic and political proposals that want to use carbon tax revenues to fund new programs and ‘reduce the deficit,’ leaving less available for tax relief and meaning the carbon tax would be a net tax increase on Americans.

Any deal using a new carbon tax to offset existing payroll taxes would surely break down quickly, because the two taxes have specific and incompatible purposes. The textbook theory of a carbon tax argues that it should reflect the social cost of carbon, rising steadily over time with atmospheric concentrations of greenhouse gases. In contrast, to fulfill its own purposes, the payroll tax should reflect the changing demographics of Social Security and other social insurance programs. Whatever relationship initially existed between a new carbon tax and the correspondingly reduced payroll tax would soon break down as these underlying factors evolved.

About the Carbon Tax Survey

A survey conducted by the Institute for Energy Research, January 2013, concludes that voters overwhelmingly oppose a carbon tax, understand that such a tax will increase energy prices, and know that the idea of a tax swap is ridiculous. IER President Thomas J. Pyle said the following:

“These survey results are further proof that voters are wiser than many people in Washington. Voters know that a carbon tax will raise energy prices, will damage the economy, will hurt the poor and those on fixed incomes the most, and, if enacted, will result in higher taxes rather than some sort of tax swap. The fact that 67% of the respondents oppose a carbon tax is encouraging; it means that voters have not been deceived by those who favor imposing an energy tax.”

“Much like the cap and trade charade, I look forward to joining forces with the majority of the American people to defeat the creation of and imposition of a job-killing, economy-wrecking carbon tax.”

Highlights of the survey:

78% agree that a carbon tax will increase energy prices.

69% agree that a carbon tax will fall hardest on the poor, the elderly, and those on fixed incomes.

77% agree that a carbon tax will lead to them paying more for gasoline and electricity.

58% disagree that a carbon tax will lead to economic growth.

The survey was conducted by MWR Strategies in December 2012 among 1000 registered voters. It has a margin of error of 3.1%.